Presumptive Taxation Scheme

CA Ankita Mathur

The Income tax Act has framed the presumptive taxation scheme to provide relief to small taxpayers, from the job of maintenance of books of accounts and from getting the accounts audited.Section 44AD, section 44ADA and section 44AE enumerate the provisions relating to presumptive taxation.

Meaning of Presumptive Taxation

Under the Income Tax Act,a person engaged in business or profession is required to maintain regular books of accounts and get the accounts audited too. The presumptive taxation scheme overrides the provisions of Income Tax Act and frees small taxpayers from maintaining and auditing the books of accounts.

Hence, a person who opts for the presumptive taxation scheme can declare income at a prescribed rate.

The Income Tax Act has provided three presumptive taxation schemes as enlisted below:

Presumptive Taxation Scheme of Section 44AD

Applicability

This scheme is applicable to all persons engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).

The scheme under Section 44AD can be adopted by:

Resident Individual

Resident Hindu Undivided Family

Resident Partnership Firm (not Limited Liability Partnership Firm)

Non-applicability

The scheme is not applicable to a certain section of persons who are eligible to claim deductions on the basis of the special economic zones in which they operate. Industrial units, small-scale industrial units and hotel businesses in backward areas which receive special deductions, as well as persons earning income on patents, will be excluded from the scope of presumptive taxation. As per the law, presumptive taxation scheme does not apply to persons covered under section 10A, 10AA, 10B, 10BA and under section 80HH to 80 RRB.

Businesses Outside Purview of Scheme

The business of plying, hiring or leasing of goods carriages referred to in section 44AE

A person who is carrying on any agency business

A person who is earning income in the nature of commission or brokerage

An insurance agent

A person engaged in a profession as prescribed under section 44AA(1)

A person whose total turnover or gross receipts for the year exceed Rs 2,00,00,000

Income Computation

The income is to be computedon presumptive basis at:

the rate of 8% of turnover or gross receipts of the eligible business for the yearor

the rate of 6%, if turnover/gross receipt is received by account payee cheque or account payee bank draft or use of electronic clearing system through a bank account

Allowance/Disallowance of Expenses

The presumptive income computed as per the prescribed rate is the final income, and no further expenses will be allowed or disallowed.

Books of Accounts

A person engaged in business/profession has to maintain books of account of his business/profession according to provisions of section 44AA.But a person who is opting for section44AD need not comply withprovisions relating to maintenance of books as per section 44AA.

Advance Payment of Tax

Any person opting for the scheme is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.

Circumstances where maintenance of books of accounts and audit is applicable

If a person declares income at a lower rate

The year in which the person opts out of the scheme

Consequences of Opting Out of Scheme

If a person opts for presumptive taxation scheme, then he should continue with the same for the next five years. If he does not follow this guideline,then presumptive taxation scheme will not be available to him for the next five years. He is required to keep and maintain books of account and is also liable for tax audit as per section 44AB, from the AY in which he opts out from the presumptive taxation scheme, provided his total income exceeds maximum amount not chargeable to tax.

Example

An assessee opts to be taxed on presumptive basis under section 44AD for AY 2017-18. For AY 2018-19 he again opts for presumptive taxation scheme. However, for AY 2019-20, he did not opt for presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2020-21 to 2024-25.

Presumptive Taxation Scheme of Section 44ADA

Applicability

A person resident in India,engaged in the below mentioned professions, can take advantage of presumptive taxation scheme of section 44ADA:

Legal

Medical

Engineering or architectural

Accountancy

Technical consultancy

Interior decoration

Any other profession as notified by CBDT

Income Computation

Income under section 44ADA is computedon a presumptive basis, i.e. @50% of the total gross receipts of the profession. However, such person can declare income higher than 50%.

Allowance/Disallowance of Expenses

The presumptive income computed at 50% is the final income, and no further expenses will be allowed or disallowed. Hence, the income computed as per prescribed rate is the final income.

Books of Accounts

A person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.But a person who is opting for sec 44ADA need not comply with the provisions relating to maintenance of books as per section 44AA.

Advance Payment of Tax

Any person opting for the scheme is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.

Consequences of Lower Declaration of Income

If a person declares income at a lower rate, and

his income exceeds basic exemption limit,

then he is required to maintain books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

Presumptive Taxation Scheme of Section 44AE

Applicability

The scheme of 44AE is applicable to

every person (i.e. individual, HUF, firm, company, etc.), engaged in business of plying, hiring or leasing of goods carriages and

who does not own more than 10 goods vehicles at any time during the year

Non-Applicability

The scheme cannot be opted for by a person who owns more than 10 goods vehicles at any timeduring the year.

Income Computation

The income under section 44AE is computed on a presumptive basis, i.e. @Rs7,500 per vehicle per month or part thereof during which the goodsvehicle is owned by the taxpayer during the year. Part of the month would be consideredasfull month.If the actual income is higher than the presumptive rate, i.e. higher than Rs 7,500, then such higher income can be declared.

Example: ABC Transportation Ltd purchased truck on 15th December 2017; then income from PGBP as per this section will be Rs7,500 x 4=Rs 30,000 p.a.(15 days of December will be considered as 1 complete month).

Allowance/Disallowance of Expenses

The presumptive income computed at Rs 7,500 per month or part thereof is the finalincome, and no further expenses will be allowed or disallowed. Hence the income computed as per prescribed rate is the final income.However, if taxpayer is a partnership firm, it can claim deduction of remuneration and interest paid to partners.

Books of Accounts

A person engaged in business/profession has to maintain books of accounts of his business/profession according to provisions of section 44AA.But a person who is opting for section44AE need not comply with the provisions relating to maintenance of books as per Section 44AA.

Advance Payment of Tax

Any person opting for the scheme is liable to pay thewhole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.

Consequences of Lower Declarationof Income

If a person declares income at a lower rate then,

he is required to maintain books of account as per section 44A, and

get his accounts audited under section 44AB

Income Tax Return

Taxpayers opting for presumptive taxation scheme as per section 44AD, section 44ADA and section 44AE of the Income Tax Act are required to file ITR 4, which does not require details.

Hence,the presumptive taxation scheme provides relief from the tedious provisions of maintenance of books of accounts and getting them audited. Even the return required to be filed is not a detailed return and only requires particulars about debtors, creditors, cash and stock.